Renting vs. Buying: Know the Right Time to Purchase a Home

5/4/2017

Is it better to rent or buy a house? That all depends on you and your unique financial situation. Asking the right questions before you buy a house is a good starting point. This will help you analyze the pros and cons of renting or buying your next home.

Do you have a 20 percent down payment?

Yes = BuyNo = Rent

Although it’s possible to secure a loan with a lower down payment (the minimum down payment for a Federal Housing Administration (FHA) loan, for example, is 3.5 percent) 20 percent is the typical down payment on a house, and is considered ideal.

A higher down payment means lower monthly payments. Consider this: a $200,000 loan at 4 percent interest has a monthly payment is $1,269 when you make only a 3.5 percent down payment. That payment drops to $954 per month with a 20 percent down payment.

You’ll also avoid paying private mortgage insurance or PMI with a 20 percent down payment. On that $200,000 loan with a 3.5 percent down payment, PMI is $158 per month.

Finally, a higher down payment could also help you secure a lower interest rate.

Do you have a good credit score?

Yes = BuyNo = Rent

Lenders use your credit score to determine your eligibility for a mortgage and the interest rate on the loan. A landlord may also check your credit score.

A low score might make it impossible to qualify for a mortgage, or if you do qualify, the higher interest rate could put the monthly payments out of reach.

Do you have an emergency fund?

Yes = BuyNo = Rent

If you’re thinking about buying a home, it’s essential to have a stash of cash set aside for emergencies (in addition to your down payment). Homeowners can’t call the landlord if the garbage disposal breaks or the roof leaks, and failing to repair issues or keep up with maintenance can affect the value of your home. (And unfortunately, it can happen more often than you think!)

What’s an appropriate emergency fund size? Again, it depends on your situation, but six months of living expenses should keep you stable. This way, if an A/C unit goes out, you can cover the cost and still have money left over for other emergencies, like an ER visit or unemployment.

Do you want your living expenses to remain stable?

Yes = BuyNo = Rent

Even if your monthly mortgage and rent would be about the same amount right now, a 30-year mortgage at fixed rate guarantees your monthly payment will remain stable for decades. In contrast, your landlord could raise the rent at the end of your lease, or rental costs could change significantly in your area. The National Association of Realtors reports that the cost to rent has increased in 75 percent of U.S. markets.

Do you want the flexibility to move or upgrade to a newer/nicer place in the next five years?

Yes = RentNo = Buy

There are a lot of upfront costs when you buy a house. It takes about five years to offset the costs of a down payment, mortgage application/loan fees and home inspections. Selling comes with its own set of fees, including real estate commissions. Renting offers a lot more flexibility if you’re not ready to settle down just yet; buying should be considered a long-term option.

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